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What's Wrong With Tucows Inc. Today?

The network services expert's first-quarter report left investors unimpressed, but its Ting-branded products could change the game in the long run.

Online services veteran Tucows(NASDAQ:TCX) reported first-quarter earnings last night, and the mixed results failed to impress investors. The stock fell as much as 9.4% Thursday morning before bouncing back to a smaller 6% drop.

What went wrong in the first quarter? Let's have a closer look.

Tucows' first quarter by the numbers

Metric

Q1 2018

Q1 2017

Change (YOY)

Net revenue

$95.8 million

$69.6 million

38%

Net income

$3.74 million

$2.45 million

53%

GAAP earnings per diluted share

$0.35

$0.23

52%

Data source: Tucows. YOY = year over year.

As a lightly covered micro cap, Tucows only had one Wall Street firm offering earnings and revenue estimates for this period. That single-firm forecast called for earnings of $0.58 per share on top-line sales near $89 million, so Tucows crushed the revenue target but fell far short of bottom-line expectations -- thin data sources and all.

For what it's worth, this was Tucows' sixth consecutive earnings miss.

The Ting Mobile wireless service showed 22% growth of a mostly organic nature, stopping at $21.9 million. The smaller Ting Internet fiber-optic network service drove revenue 35% higher as the service continued to roll out in a handful of handpicked test markets. Total sales in this segment added up to $1.74 million.

Image source: Getty Images.

Digging deeper into Ting Mobile

In a conference call with (two!) Wall Street analysts, Tucows CEO Elliot Ness shared some insights on the evolving mobile services market and how these changes might affect his Ting Mobile business.

"We now recognize clearly that the four major carriers who still own over 90% of the market have made significant changes and improvements since we launched Ting seven years ago," Ness said according to a transcript from by Seeking Alpha. "They have addressed key customer pain points. Most importantly, across the board they have launched more affordable high data and unlimited plans and shouted about it from the rooftops. The acquisitions and relaunches of both Cricket and MetroPCS have filled in a lot of the white space we previously occupied."

As a result, Ness elaborated, all four of the major networks are catching up to Ting's formerly large lead in customer satisfaction metrics and low subscriber churn.

"It seems customers are generally less frustrated by their providers now, less inclined to look around, and perhaps less impressed with what they see out there when they do a comparison," Ness continued.

So it may be time for Ting Mobile to make some improvements after running its business virtually unchanged for seven years. In particular, there seems to be room for lower prices because "margins are frankly a bit higher than we need them to be," in the CEO's own words.

Moreover, Ness expects the pending merger between T-Mobile US(NASDAQ:TMUS) and Sprint(NYSE:S) to unlock some cost-saving opportunities for Ting Mobile. As a mobile virtual network operator (MVNO), Ting actually resells access to T-Mobile's and Sprint's networks, so combining the two suppliers should simplify both the business and technical sides of running Ting Mobile. And the two would-be merger partners are likely to support their MVNO partners in order to push the acquisition idea through regulatory roadblocks.

Here's why you should pay attention to Tucows

The post-merger domain name business provides a broad and stable financial platform from which Tucows can reach for more ambitious growth opportunities in other markets. The Ting Mobile and Ting Internet businesses are starting to look like serious contributors over the long term, especially if Tucows can get Ting Internet out of its experimental development stage and start looking for larger target markets.

The stock is still up 16% in the last three months despite today's sudden drop, which isn't too shabby. All told, Tucows remains a solid and interesting growth opportunity for investors with plenty of patience for micro-cap volatility.